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Central bank chief wants “credible” debt reduction plan in October budget

By on September 1, 2021 0

The October budget is expected to include revenue raising measures for the government to start reducing state debt after the pandemic, the central bank chief warned.

In the annual pre-budget letter, Governor Gabriel Makhlouf said the state’s resilience to future shocks would be weakened if increases in spending from Covid-19 are not offset by measures to generate more tax revenue.

He said a credible plan is to set deficit reduction targets in the wake of the Covid crisis, as the economy is expected to grow rapidly in the years to come, without the need for additional stimulus that could create inflationary pressures.

Budget planning could include “measures such as broadening the tax base, reducing some tax breaks or changing some tax rates,” the central bank said.

Mr Makhlouf also reiterated that potential profits should be used to pay down debt, citing potential one-time income gains from corporate tax receipts or income from the sale of government stakes in banks.

The letter comes after the finance ministry presented its economic forecasts and spending projections for the coming years in its Summer Economic Statement published in July.

However, Makhlouf makes it clear that the Central Bank is concerned that the government will block spending increases permanently, even as the state meets its obligations due to climate change and an aging population.

Central bank economists have also warned of heightened risks as large debt levels stretch through the end of 2025.

The research, A medium-term risk analysis for public finances, which was written by Thomas Conefrey, Rónán Hickey and Graeme Walsh, reexamines the threat to the government’s corporate tax.

Economists said that projections in the Summer Economic Statement since the government’s budget forecasts in April “contained significant upward revisions to public expenditure plans” but did not provide for “any new discretionary compensatory measures to increase revenues”.

They said two-thirds of the spending increases proposed in the summer declaration were on current spending “while the rest is public investment” and leaves the economy ill-prepared for any further economic shock that would cause a shock. reduction in government tax revenues.

“As a result, the government now expects high deficits and debt to continue until 2025,” they said. “A permanent loss of corporate tax combined with a negative external shock could push public debt to over 115% of modified national income by 2025.”

Research warns of the potential for the economy to overheat as recovery takes hold after the Covid crisis.

“The current finance ministry forecast indicates that domestic demand is expected to grow at an average annual rate of 4.5% from 2022 to 2025,” economists said.

“In an economy growing at this rate, there is a risk that additional government spending without compensating for tax increases could generate excessive inflationary pressures leading to the emergence of imbalances in the economy,” they said.